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Short-Term Energy and Summer Fuels Outlook

The price of West Texas Intermediate (WTI) crude oil averaged $100 per barrel in 2008. The global economic slowdown is projected to reduce the average price to $53 per barrel this year. Assuming an economic recovery next year, WTI prices are expected to average $63 in 2010.

Gasoline prices have increased to more than $2 per gallon, rising slowly but steadily since the beginning of the year in conjunction with rising crude oil prices and refiner margins recovering from recent near-historic lows. During this summer driving season (April through September) retail regular grade gasoline prices are projected to average $2.23 per gallon, down almost $1.60 from last summer. The average gasoline price for all of 2009 is expected to be $2.17 per gallon, increasing to an average of $2.42 in 2010. Diesel prices are projected to average about $2.27 per gallon during this driving season and to average $2.30 and $2.69 per gallon annually in 2009 and 2010, respectively.

Total consumption of natural gas is projected to fall by nearly 2 percent in 2009, leading to lower natural gas prices. Industrial natural gas consumption is expected to decline by more than 7 percent, as industrial production declines during the current economic downturn. However, natural gas consumption in the electric power sector is projected to increase by almost 1 percent, since the lower natural gas prices will back out some coal consumption in this sector. The Henry Hub natural gas spot price is projected to decline from an average of $9.13 per thousand cubic feet (Mcf) in 2008 to $4.24 per Mcf in 2009, then increase in 2010 to an average of more than $5.80 per Mcf.

Global Petroleum

Overview. Despite high oil inventories in Organization for Economic Cooperation and Development (OECD) countries, crude oil prices rose steadily in March. Lower crude oil production by members of the Organization of the Petroleum Exporting Countries (OPEC) has lowered world petroleum supplies, substantially offsetting reduced oil demand caused by the global economic recession. Higher oil prices, as well as the change in market sentiment to a slightly less pessimistic outlook, may also reflect the market’s belief that economic recovery policies from central banks and governments have slowed down the decline in demand and even improved the chances for an economic upturn and, consequently, higher oil demand, later this year.

The timing and pace of the global economic recovery will determine whether the higher crude oil prices seen during March are sustainable. The prospects of limited growth in non-OPEC production and the expected start of economic recovery later this year, that should increase oil consumption and the demand for OPEC oil, are the main factors supporting the upward price path. If economic recovery begins earlier and is stronger than assumed in this Outlook, there is an upside risk of higher oil prices than currently projected. The downside risk to oil prices is a scenario of a prolonged economic downturn followed by a weak recovery, which could produce a greater decline in consumption than currently expected. This latter scenario would challenge the willingness of OPEC’s members to sustain lower output levels for a longer period.

Consumption. World oil consumption is expected to drop by 1.35 million barrels per day (bbl/d) in 2009 compared with year-earlier levels, due to the global economic recession. EIA assumes that the global gross domestic product (GDP), weighted by oil consumption, will fall by 0.8 percent this year. Consumption is expected to fall by 1.6 million bbl/d in the OECD countries and rise by 270,000 bbl/d in non-OECD nations. The bulk of the decline is expected to be concentrated in the first half of the year. World oil consumption is expected to grow by 1.1 million bbl/d in 2010, driven by a recovery of global GDP growth to 2.6 percent.

Non-OPEC Supply. Non-OPEC supplies in 2009 are expected be close to last year’s levels. The United States, Brazil, and Azerbaijan will show large growth in supplies this year. However, these increases in production are offset by large declines in production from Mexico, the North Sea, and Russia. Even this pessimistic forecast still contains considerable downside risk, especially from additional project delays and higher-than-anticipated decline rates. Non-OPEC supply is expected to increase by a modest 260,000 bbl/d in 2010, due to increasing production from Brazil, the United States, and the former Soviet Union.

OPEC Supply. OPEC left its production targets unchanged from last month, citing concern that reducing production further might harm the world economy. Estimated OPEC crude oil production fell by 1.1 million bbl/d during the fourth quarter of 2008, reaching 30.6 million bbl/d, then fell by an additional 2.1 million bbl/d in the first quarter of 2009 to 28.5 million bbl/d. EIA expects production to remain close to that level in the second quarter, then gradually increase to about 29.2 million bbl/d in the fourth quarter. EIA expects OPEC crude oil production in 2009 to average 28.8 million bbl/d, then rise to 29.8 million bbl/d in 2010 in response to an expected increase in world oil consumption. In addition, EIA expects that OPEC production of non-crude liquids will grow by 420,000 bbl/d in 2009 and by 720,000 bbl/d in 2010.

Inventories. OECD commercial inventories at year-end 2008 stood at 2.68 billion barrels. At 56 days of forward cover, OECD commercial inventories were above average levels for that time of year. Preliminary estimates suggest that OECD commercial inventories at the end of March 2009, measured in terms of days of forward supply, continued to remain substantially above average levels for this time of year.

U.S. Crude Oil and Liquid Fuels

Consumption.Total U.S. consumption of liquid fuels in 2008 declined by almost 1.3 million bbl/d, or 6.1 percent, from that of 2007. The major factors contributing to the fall in consumption were a rapid rise in retail prices to record levels during the first half of 2008 and a deteriorating economy in the second half of the year. Total liquid fuels consumption for 2009 is projected to fall by a further 430,000 bbl/d, or 2.2 percent, because of a continued weak economy. The economic recovery is projected to boost total liquid fuels consumption in 2010 by 270,000 bbl/d, or 1.4 percent, with all of the major fuels registering consumption increases.

Production. Crude oil production declined by 110,000 bbl/d in 2008, primarily due to hurricane outages, and is projected to increase by 440,000 bbl/d in 2009 to an average of 5.40 million bbl/d. This would be the first increase in production since 1991. Output is projected to rise by an additional 150,000 bbl/d in 2010. Contributing to the increases in output are two platforms in the Gulf of Mexico: Thunder Horse, which is already in production, and Tahiti, which is expected to come on stream later this year.

Prices. Under current economic and world crude oil supply assumptions, EIA expects WTI prices to average $53 per barrel in 2009 and $63 per barrel in 2010. A stronger-than-expected economic recovery, lower non-OPEC production because of the current low oil prices and financial market constraints, or more aggressive action to cut production by OPEC countries could lead to a faster and stronger rise in oil prices.

Regular-grade gasoline prices, which averaged $3.26 per gallon in 2008, are projected to average $2.17 per gallon in 2009 and $2.42 per gallon in 2010. On-highway diesel fuel retail prices are projected to average $2.30 per gallon in 2009 and $2.69 in 2010. The expected continuing decline in diesel fuel consumption in the United States this year as well as the growing weakness in distillate fuel usage outside the United States are projected to result in lower refining margins for distillate throughout the forecast period. Because of the global weakness in industrial output and the onset of a recovery in motor gasoline consumption, domestic diesel prices could fall below gasoline prices this summer.

Summer Transportation Fuels Outlook

The increase in consumption provided by the dramatic fall in petroleum prices from last year is being offset by the weak economy. These counter-balancing forces are expected to be prominent features of the summer driving season, defined as the period from April 1 to September 30.

Prices. Regular-grade gasoline retail prices, which averaged $3.81 per gallon last summer, are projected to average $2.23 per gallon during the current driving season. The monthly average gasoline price is expected to peak at about $2.30 per gallon late this summer. Diesel fuel prices, which averaged $4.37 per gallon last summer, are projected to average $2.27 this summer. However, because short-term prices can be quite volatile, weekly prices will be higher (or lower) than the monthly average. In addition, if consumption turns out to be greater than projected in this Outlook, there could be increases in the monthly price averages.

Because taxes and retail distribution costs are generally stable, movements in gasoline and diesel prices are driven primarily by the change in crude oil prices and wholesale margins. These retail price projections reflect lower prices for the refiner’s average acquisition cost of crude oil, projected to average about $52 per barrel this summer, significantly lower than the $116 per barrel average last summer. Wholesale gasoline margins (the difference between the wholesale price of gasoline and the average cost of crude oil) are expected to be relatively unchanged from the average of 39 cents per gallon last summer. Wholesale diesel margins, on the other hand, are projected to be significantly lower this summer (31 cents per gallon) than last summer (80 cents per gallon) because of global weakness in distillate markets.

Motor Gasoline. During the summer season, motor gasoline consumption is projected to increase by 1.0 percent to 9.1 million bbl/d. Gasoline consumption last summer was low due to the high gas prices and hurricane-related distribution problems, and consumption is not expected to begin showing consistent year-over-year growth until the third quarter.

Motor gasoline is supplied by four sources: domestic crude oil refinery output, domestic production and imports of fuel ethanol for gasoline blending, primary inventories, and net imports of motor fuel and blending components. This summer’s domestic refinery gasoline supply is expected to increase by about 240,000 bbl/d from last summer’s average. Refinery production of gasoline was depressed last year as refiners maximized distillate production because of the much stronger diesel fuel market relative to gasoline. This year the diesel market is being hit the hardest by the economic downtown, and refiners are expected to lean toward more gasoline production.

Fuel ethanol blending into gasoline increased from an average of 437,000 bbl/d during the summer of 2007 to 635,000 bbl/d during the summer of 2008, and is projected to average 670,000 bbl/d this summer. EIA expects the growth in ethanol plant capacity and production over the last few years to slow dramatically in 2009 as lower gasoline prices depress ethanol production profits, and financial market constraints curtail construction plans and contribute to the temporary shutdown of several facilities.

At the onset of the summer driving season (April 1), total gasoline stocks, at 217 million barrels, are estimated to be ample. That level is 4 million barrels below last year, but 8 million barrels above the previous 5-year average. Because of the lower current inventory level than last year, EIA projects the average stock draw will be about 60,000 bbl/d, compared with last summer’s 173,000 bbl/d stock draw and the average of 45,000 bbl/d over the last 5 years.

For the current summer season, net imports of motor gasoline and blending components are projected to average 900,000 bbl/d, down almost 80,000 bbl/d from last summer’s average because of the expected higher refinery gasoline yields and increase in ethanol blending this year.

Diesel Fuel. Distillate fuel consumption, which includes both diesel fuel and heating oil, is projected to be about 170,000 bbl/d, or 4.5 percent, lower than last summer’s average.

Distillate fuel is supplied by four sources: domestic refinery output, biodiesel blending, primary inventories, and net imports. Refinery production this summer is projected to average about 300,000 bbl/d lower than last summer’s record average of 4.33 million bbl/d. Refiners maximized production of distillate fuel last year since diesel fuel wholesale prices were about 40 cents per gallon higher than gasoline wholesale prices. Biodiesel is a small part of the distillate pool. Biodiesel blending averaged about 20,000 bbl/d last summer and is expected to grow to about 35,000 bbl/d this summer as refiners and blenders adjust to the 500-million-gallon biodiesel blending mandate for 2009 under the Renewable Fuels Standard.

Distillate inventories are projected to start the summer season at a record 142 million barrels, about 30 million barrels higher than the previous 5-year average. While distillate stocks normally build during the summer season in preparation for winter heating demand by an average of 21 million barrels during the five previous summers, inventories this summer are expected to show little change.

Continuing strong world demand for distillate fuels last year despite record-high prices contributed to U.S. net exports of distillate fuel averaging almost 420,000 bbl/d during last summer. During the previous five summers (2003 – 2007) the United States was a net importer of distillate fuel, at an average of 120,000 bbl/d. This summer, despite the cutback in domestic refinery production, the United States is expected to continue be a net exporter, averaging about 380,000 bbl/d.

Natural Gas

Consumption. Total natural gas consumption is projected to decline by 1.8 percent in 2009 and remain relatively unchanged in 2010. EIA expects the current decline in economic activity will have a significant impact on natural gas consumption in the industrial sector, which is forecast to fall by 7.4 percent this year. In the residential and commercial sectors, where consumption is influenced more by weather than by macroeconomic conditions, natural gas use is expected to increase slightly in 2009. The expected 0.7-percent increase in natural gas consumption in the electric power sector this year is supported by a projection of lower natural gas prices for power generation relative to coal, particularly in the Southeast. The outlook for natural gas consumption in 2010 remains subject to uncertainty about the status of future economic conditions. If the economy begins to recover later this year as currently expected and weather remains near normal, small consumption growth in the industrial and electric power sectors should be offset by small declines in the residential and commercial sectors.

Production and Imports. Total U.S. marketed natural gas production is expected to decline by 0.3 percent in 2009 and by 1.0 percent in 2010. Total working natural gas rigs in the United States have declined from slightly more than 1,600 in late August 2008 to slightly below 800 as of April 9, according to Baker Hughes. The precipitous drop in drilling activity and declining productivity of wells already in place are expected to cause production to steadily decline as the year progresses. The resultant impact of lower production in the Lower-48 non-Gulf of Mexico (GOM) during the second half of 2009 is expected to more than offset higher year-over-year production during the first half of the year. Additional supply curtailments may be necessary as natural gas storage levels approach capacity later this summer. Marketed production from the Federal GOM is expected to increase by 1.9 percent in 2009 because of continued recovery from the 2008 hurricane season and new supplies associated with the startup of offshore oil production facilities. Despite expectations of higher prices and the recovery of drilling programs next year, total production in 2010 is expected to be lower in both the lower-48 non-GOM and Federal GOM regions.

Projected U.S. liquefied natural gas (LNG) imports are expected to increase to about 480 billion cubic feet (Bcf) in 2009, from 352 Bcf in 2008, because of lower global economic activity and the start up of new liquefaction capacity in the Middle East and other parts of the world. Depressed LNG demand in Asia and Europe should tend to increase the amount of LNG available to the United States. However, the LNG projection is subject to considerable uncertainty. Initial production from new liquefaction capacity has been slowed or delayed for extended periods, and U.S. natural gas demand is also projected to be lower in 2009. As a result, expanded LNG flows into the United States likely would depend on there being less domestic natural gas production or imports from Canada than forecast. In the current outlook, U.S. pipeline imports are expected to decline by about 11 percent in 2009.

Inventories. On April 3, 2009, working natural gas in storage was 1,674 Bcf. Current inventories are now 310 Bcf above the 5-year average (2004–2008) and 438 Bcf above the level during the corresponding week last year. This year’s end-of-March working natural gas storage level was the second highest recorded since 1991, exceeded only by the 1,692 Bcf recorded at the end of March 2006. Working natural gas inventories are projected to rise to possibly new record-high levels by the end of the summer injection season.

Prices. The Henry Hub spot price averaged $4.08 per Mcf in March, $0.57 per Mcf below the average spot price in February. Lower consumption, brought about by the economic slowdown, and higher production levels have been the primary contributors to lower natural gas prices. Henry Hub spot prices began April below $4 per Mcf and, absent signs of dramatic economic recovery, are expected to remain below $4 until seasonal space heating demand picks up this fall. Higher prices are expected in 2010 as the economy improves. In addition to demand recovery, the current drilling cutback and limited access to credit for producers could lead to even higher prices if supply fails to keep pace with demand in the short-term. On the other hand, a larger-than-expected increase in LNG import volumes coupled with sustained economic weakness could keep prices depressed. The Henry Hub spot price is expected to average $4.24 per Mcf in 2009 and $5.83 per Mcf in 2010.

Electricity

Consumption. Cooling degree-days this summer are projected to be 5 percent lower than during the summer of 2008. The reduced need for air conditioning combined with the impact of the recession on electricity sales, especially in the industrial sector, are expected to reduce total electricity consumption by 1.6 percent in 2009. Consumption is expected to return to a more normal growth rate of 1.4 percent in 2010.

Prices. The reduction in electricity sales has increased the average cost of electricity for many utilities. Under cost-of-service regulation, fixed capital costs are spread out among a declining number of kilowatthours, in some cases offsetting the reduction in variable fuel costs. As a result, residential electricity prices are projected to increase slowly, at an average annual rate of about 1.8 percent in both 2009 and 2010.

Generation. Coal-fired generation in the electric power sector is expected to decline by 3.2 percent in 2009 while generation fueled by natural gas is expected to increase by 1.6 percent, primarily due to the favorable natural gas prices compared with delivered coal prices. Difficulties in obtaining credit reportedly have hampered the addition of windpower capacity by some developers. Thus, growth in wind generation is expected to slow appreciably through 2010, after having grown 50 percent last year.

Coal

Consumption. Coal consumption in the electric power sector fell by 0.3 percent in 2008. A decline in overall electricity generation, combined with projected increases from other fossil-based (natural gas and petroleum) and renewable generation sources (hydroelectric and wind), are projected to lead to a 2.6-percent decline in electric-power-sector coal consumption. An expected increase in total electricity generation of 1.5 percent in 2010 is expected to lead to a 1.1-percent increase in electric-power-sector coal consumption. Consumption growth in the coke plant sector is expected to continue falling over the forecast period.

Production. A significant increase in coal exports in 2008 contributed to a 2.2-percent increase in coal production. Production is expected to fall by 5.3 percent in 2009 as lower total domestic coal consumption is combined with export declines. Production is projected to increase by 2.3 percent in 2010 as domestic consumption and exports increase with an improving economy.

Exports. Reductions in global coal demand, coupled with the return to normal supply conditions in other major coal-producing and exporting countries, are expected to reduce U.S. coal exports by about 9 million short tons, an 11-percent decrease, in 2009 relative to 2008. The improving global economy in 2010 is expected to increase global coal demand and lead to a projected 11-percent increase in exports.

Prices. The average delivered coal price to the electric power sector is estimated to have increased by more than 17 percent in 2008, to an average $2.07 per million Btu. Although record increases in spot prices (some well over 100 percent) for several types of coal contributed to the increase in the cost of coal, a rise in transportation charges was the primary reason for the cost increase. Declines in electricity demand and lower transportation costs should cause the annual average delivered coal price to decline to $2.03 per million Btu in 2009 and $1.91 in 2010.

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